IP in SMSF

Now that, within limitations, you can borrow to invest in property.

I was wondering if you purchased a holiday house down the coast and rented it at market (not to yourself obviously) whether you can manage it yourself and do your own repairs?

What if you needed to spend a week or two (or four) there doing some maintenance. Do you breach the in-house asset or sole purpose rules?

 

Calling DrJohns - wake up now!

There is nothing stopping you managing any type of property yourself when it is owned by your SMSF (regardless of whether there are SMSF borrowings involved or not).

You as trustee however cannot get paid a commission or management fee as that would breach the sole purpose test. The only exception would be if you had a real estate agency (company) and your agency managed properties - then your company could receive management fees - but not you directly as trustee.

In regards to staying at the property while undertaking significant repairs is another story.

The ATO has covered this issue quite extensively in SMSFR 2008/2 which you can find here:

SMSFR 2008/2 - Self Managed Superannuation Funds: the application of the sole purpose test in section 62 of the Superannuation Industry (Supervision) Act 1993 to the provision of benefits other than retirement, employment termination or death benefit


Example 3 is where you need to look, which can be summarised as follows:

Four weeks of repairs? Hmmmm - wouldn't be during school holidays would it?

Direct from the ATO:

Also, if there 'repairs' are that significant, are you sure that they are not actually renovations?

A SMSF that purchases a property (any type of property: residential, holiday, commercial) needs to be careful if it undertakes renovations as this may cause a replacement asset to be created (which is a breach of SIS s67A in regards to the conditions of limited recourse borrowings).

I say 'may cause' - NOT 'will cause'. I have expressed my opinion on what type of renovates a SMSF that has purchased a property using limited recourse borrowings in the following article:

Can you renovate a property purchased under a SMSF limited recourse loan?

In summary my opinion is that a high yielding holiday property can be a good investment for a SMSF. It also has the added benefit of being able to be transferred to the members of the SMSF at retirement (at market value of course) - so can also be a good lifestyle investment.

Just don't fall into any traps around the sole purpose test as the ATO will throw the book at you.

I hope you find this information helpful.

Good luck.

SM

 

Thanks Superman. I am well aware of any tax implications.

I was just under the impression that if you accidentily flew over your property on a trip to Melbourne you breach some rule!?

If you have time, what is your opinion on Sole Purpose etc.?

I believe a it is good strategy to buy a property that you will eventually retire to. Who gets hurt by you staying there occassionally?

If you buy artwork at an auction, do you have to bag it and and turn your head as soon as the hammer goes down lest you might enjoy it? If that artwork is by, say Andy Warhol, can we argue that we get no enjoyment from having a painting of a can of tomato soup hanging in our home?

Do you think that super should be able to be used as an asset, at least when say purchasing a home? This is after all our biggest retirement asset. Is there a rationale behind having half a mill in super but you can't afford a home? (thats an example only. You may have 100K in super but can't afford a home deposit).

 

You want to hold your assets in a trust (and a heavily regulated statutory trust at that) and yet still have it counted as personal equity ?

I am sure some solvency lawyers and bankruptcy trustees would love this to be the case as well.

Centrelink and every government means tested assistance would like it even better.

Cheers,

Rob

 

Thanks Rob. The answer is so obvious once you hear it.